BOJ says government needs to sustain investor trust

‘VERY BAD SHAPE’:The central bank governor said spurring inflation would not solve Japan’s debt problems because it would add to the government’s spending burden

Bloomberg

Bank of Japan (BOJ) Governor Masaaki Shirakawa said the Japanese government needs to work to maintain investor trust in its debt, two weeks after Standard & Poor’s (S&P) downgraded the nation’s sovereign credit rating.

Japan should make “every effort to maintain the confidence shown by markets while working on mid to long-term fiscal consolidation,” Shirakawa said at a speech at the Foreign Correspondents’ Club of Japan in Tokyo yesterday.

While investor appetite for government debt has contained borrowing costs, “no country can continue to run fiscal deficits forever,” he said.

S&P last month cut Japan’s debt rating to AA-, the fourth-highest level, saying it expected the country’s government debt ratios to continue to rise. The nation’s long-term yields, about 1.3 percent, have helped the government finance a debt burden approaching 200 percent of GDP, the largest in the industrialized world.

“Governor Shirakawa has repeated his warnings against Japan’s ballooning public debt and his comments on the issue is becoming more clear after Japan’s rating was actually cut,” said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Co in Tokyo.

Shirakawa said spurring inflation alone won’t be able to ease Japan’s debt, which is in “very bad shape.”

While price increases could increase tax receipts, it would also add to social security and other government spending burdens, he said.

S&P’s downgrade followed forecasts by the government indicating Japanese Prime Minister Naoto Kan may need to abandon his pledge to contain new bond sales because of a lack of revenue.

BOJ board member Hidetoshi Kamezaki said last week financial markets have reacted calmly to the downgrade of Japan’s debt.

Even so, it’s necessary to bear in mind the risk that financial markets could “suddenly” turn to be volatile on concern about sovereign debt even if there is no change in the state of the economy or the nation’s finances, Kamezaki added.

The yield on benchmark 10-year government debt reached 1.3 -percent, the highest in almost nine months, after an unexpected drop in the US jobless rate drove up Japanese Treasury yields. Japan’s bond yield have been underpinned by low interest rates and domestic savings that have helped fuel government spending.

The Japanese Finance Ministry said the nation’s public debt will probably swell to ￥997.7 trillion (US$12.1 trillion) in the year starting April. It projects debt sales may surpass ￥50 trillion in the period starting April 2013 amid a growing revenue shortfall.

The governor also said the central bank’s purchases of government debt aren’t intended to finance -public spending. The central bank purchases ￥1.8 trillion of government bonds every month, as well as in its asset purchase program.

“The BOJ wants to avoid giving the impression that it is financing debt issuance with its bond purchases,” Shikano said.

Shirakawa also said the nation’s economy is recovering. GDP growth will probably accelerate each quarter of this year after contracting at a 1.9 percent annual rate in the three months ended December, according to surveys of economists by Bloomberg News. The Japanese Cabinet Office is scheduled to release the fourth quarter GDP report on Monday.

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